TELF AG: Nickel Market Faces Challenges Amidst Surplus and Worsening Fundamentals – June 21, 2023
Disappointing performance
The first months of 2023 have been marked by a disappointing performance for nickel, making it the worst performer among all the base metals traded on the London Metal Exchange (LME). A combination of factors, including a significant price increase in 2022 followed by a correction and worsening market fundamentals, have contributed to this decline.
One of the primary drivers of nickel’s poor performance is the substantial market surplus of Class 2 nickel, which emerged in 2022 and is expected to persist throughout 2023-2024. This surplus is mainly attributed to the overproduction of low-grade nickel in Indonesia. According to estimates from Norilsk, a leading nickel producer, over 100 kt of low-grade nickel were accumulated in 2022, with a significant portion finding its way to China.
China has become a major player in the nickel market, storing at least 700 kt gross of nickel pig iron (NPI) stocks at ports. It is anticipated that substantial amounts will continue to be stockpiled in 2023 as Indonesia ramps up its nickel production capacities. The abundance of low-grade nickel and the accumulation of NPI stocks in China have contributed to the challenging market dynamics for nickel.
Adding to the woes of the nickel market is the recent plunge in the LME nickel contract, which has experienced a decline of around 30% year-to-date in 2023. This drastic drop in prices can be attributed to a combination of factors, including the aforementioned surplus, weakening market fundamentals, and a correction following a significant price increase in 2022.
Despite the troubling market dynamics, it is worth noting that nickel exchange inventories remain at historically low levels. In fact, they currently stand at a level last seen in 2007, amounting to less than five days of global usage. This suggests that the supply-demand imbalance may not be fully reflected in the exchange inventories, and there may be additional factors influencing the market dynamics.
The nickel market’s performance in 2023 serves as a reminder of the inherent volatility and uncertainty that commodity markets can experience. The overproduction of low-grade nickel in Indonesia and the subsequent accumulation of NPI stocks in China have disrupted the market equilibrium, leading to a significant surplus and downward pressure on prices.
As the new Indonesian nickel production capacities continue to ramp up, it is crucial for market participants to closely monitor the developments in the nickel market. The timing and pace of production increases, as well as the demand outlook, will play pivotal roles in determining the future trajectory of nickel prices.
It remains to be seen how the nickel market will adapt and rebalance in the coming months. Market participants and investors must remain vigilant, taking into account the evolving fundamentals and supply-demand dynamics to make informed decisions. The challenges faced by the nickel market in 2023 highlight the importance of a comprehensive understanding of market fundamentals and the ability to adapt to changing conditions in the commodities sector.
